Cash Market

Speaking of "the cash market" as a single thing is a convenience that conceals its structure. What exists is a layered set of local markets, each with its own participants, its own balance of supply and demand, and its own price, connected to the others by the possibility of moving goods between them.

The farm gate

Where producers sell. Often the least competitive layer, because a producer’s realistic set of buyers is bounded by what it costs them to reach one, which can be very few.

The assembly layer

Elevators, collectors, and cooperatives aggregating many small lots into commercial parcels. This is where fragmentation is first reduced and where lots typically lose their individual identity to commingling.

The merchant layer

Parties who move commodities between locations and over time. They connect local markets to each other, and their activity is what makes parity relationships bind.

The processing and consumption layer

Buyers who want the commodity for what it does — millers, crushers, roasters, feeders. Their specifications are where quality attributes acquire value.

The international layer

Cargoes moving between origins and destinations, on terms allocating cost and risk between exporter and importer.

A price exists at each of these layers and at each location within them, and the differences between them are not error. They are the cost of assembly, transport, storage, and risk-bearing, plus whatever margin the parties at each layer command given how much competition they face. The whole structure is the cash market, and none of its prices is more the price than any other.

Cash market transactions are private. When two parties agree a lot at a price, that fact is known to them and to nobody else. This is the opposite of an organised exchange, where transacting is inherently public, and it means the cash market — the part where the commodity actually changes hands — is structurally the least observable part of the system.

Market reporting exists to address this. Public authorities and reporting services collect transaction information and publish it in specified form, so that participants who were not party to a transaction can nonetheless learn what it was. This reporting is what allows a producer to know roughly what their crop is worth without conducting an auction, and it is why price reporting is treated as market infrastructure rather than as a commercial convenience.

• Reported cash prices cover what was collected, not everything that transacted; coverage varies by market and by location
• Where transactions are too few to observe, a reporting service may publish an assessed value rather than an observed price — a different kind of fact
• Bilateral terms that accompany a price — adjustments, delivery obligations, credit — are frequently not reported, so the reported number is not the whole deal
• The layers with least transparency tend to be those with least competition, which compounds the problem for the parties least able to bear it
• A reported price is a description of transactions that occurred; it is not an offer, and no party is obliged to transact at it

The cash market and the futures market are frequently discussed as if they were parallel worlds, one physical and one financial. They are not parallel; they are joined, and the joint is the delivery mechanism. Because a futures contract can be settled by delivering the physical commodity at a designated point, the futures price cannot wander freely away from what the physical commodity is actually worth at that point as the contract approaches its term.

This tether runs in one direction that is worth being clear about. The physical market is what the contract refers to, and the possibility of delivery is what disciplines the contract price. The contract market in turn provides the physical trade with a common reference to quote against — so the influence is mutual, but the anchoring is physical. A futures contract with no credible delivery mechanism would be a number about nothing; a cash market with no futures reference would still be a market in a commodity people eat.